811.515 Silver/35: Telegram

The Counselor of Legation in China (Gauss) to the Secretary of State

462. By instruction from Nanking received last evening the Minister directs me to transmit by radio to the Department the following [Page 447] memorandum on the exportation of silver from China copy of which was communicated to him for his confidential information on October 5th by Dr. Kung, Minister of Finance, who has asked that it be sent to the Department with the request that the Department permit Chinese Minister Sze to have a copy, he being told that the memorandum is on its way to him by mail. The Minister directs me to add that the memorandum expresses the views of Dr. Kung and that these views are concurred in by the American advisers to the Finance Ministry notably Dr. A. N. Young. The memorandum follows:

October 5, 1934.

Memorandum on the Exportation of Silver from China

Extent of Exportation.

During the 10 years ending with December 1931 China imported an average of about $100,000,000 worth of silver annually. Beginning with 1932, the movement was reversed. According to published customs returns aggregate net exports in 1932 and 1933 were $10,395,000 and $14,423,000 respectively and were $132,167,000 in the first 8 months of 1934. Export applications furnished to the Central Bank by the customs in Shanghai amounted to $35,586,000.

Thus total net exports in the first 9 months of 1934 were about $168,000,000 or more than three times as much as was exported in any preceding year, $49,000,000 in 1907 being the maximum.

Stocks of Silver in Shanghai.

For various reasons, including both banking developments and the general economic situation, there has been a gradual accumulation of silver in Shanghai in recent years. This has no doubt facilitated rapidity of export, but it has also therefore increased the scope of the difficulties which heavy exports of silver may set in train. Total stocks of silver in Shanghai were reported as follows as at the end of each of the last 5 years and as of June 28 and September 25, 1934.

1929 $268,019,000
1930 277,804,000
1931 252,008,000
1932 393,038,000
1933 508,430,000
June 28, 1934 544,248,000
September 25, 1934 417,100,000

Stocks in Chinese banks as of September 25, 1934 were $275,938,000 or 66 percent of the total.

Causes of Exportation.

The immediate explanation is that silver in terms of United States dollars and/or sterling has become more valuable abroad than at Shanghai, to such an extent that a profit can be made from shipment. However, the difference must exceed about 6 percent of the price abroad, since otherwise expenses would not be covered. The difference has been as high as 10 percent in recent weeks, and on October 5 was about 6⅔ percent.

[Page 448]

Stated differently the banks export silver to replenish balances abroad. This export becomes necessary when they are confronted with a demand for foreign currencies, arising, for example, out of merchandise import transactions at a time when they have not a sufficient supply of foreign credits arising from merchandise export bills, involving remittances of overseas Chinese, et cetera. For some time merchandise exports from China have been greatly depressed because of the world’s reduced buying power for these goods and because China’s rising exchange puts China at a disadvantage in obtaining what market there is. Similarly remittances to China from overseas Chinese are much reduced.

Moreover the rising price of silver abroad stimulated by the American buying unduly aggravates the drain. In addition to exports of silver to replenish bank balances abroad, a potential drain is developing because many holders of silver in China are coming to feel that the American buying program will put up silver abroad to such an extent that the Chinese Government will be forced by circumstances to take measures that would restrict a corresponding increase in the value of silver in China, Consequently such holders are inclined to ship out silver rather than risk possible interference by the President at a later date. Similar action may be taken by holders of investments in China if the situation becomes more aggravated. This latter would amount to a flight of capital.

Due to the foregoing conditions, the balance of payments is for the time being out of equilibrium, and threatens to be further disturbed. During 1932 and 1933, the drain on China’s stock of precious metal was reflected chiefly in gold exports, which amounted to $110,163,000 and $68,608,000 net, respectively, in those years. During the first 6 months of 1934, net exports of gold were $36,327,000; during July they were $5,815,000; and during August they were nil. The available stock of gold were seen approaching exhaustion, and the stock of monetary silver is being drawn upon increasingly.

Consequences of Silver Exports.

If exportation of silver should continue on a considerable scale, the gradual decrease of stocks of silver at Shanghai would tend to cause money to become tighter. This would be reflected in higher interest rates, selling of Government bonds and other securities, lower prices for domestic commodities, and a tendency of banks to restrict credit.

Under ordinary conditions reserve forces would be operating which would tend to check these tendencies. Exports of silver tend to restore equilibrium by providing exchange. Likewise such shipments tend to reduce the differential between silver abroad and in China, because the sale of silver abroad tends to reduce the price there, whereas exchange sold against shipment tends to raise the value of silver in China in terms of foreign currencies. Higher interest rates, higher yield on Government bonds and other securities, and lower commodity prices would tend also to keep funds in China. But these forces are harshly deflationary and their operation would cause very severe hardship, including reduced business profits, increasing business failures, unemployment and loss of Government revenue.

Operation of these corrective forces, however, is impeded by the artificial stimulus to the silver price abroad resulting from actual and prospective American purchases. Declaration of war upon this [Page 449] drain of silver threatens to destroy sooner or later metallic basis of clearing currency.

The crucial element in the situation is public confidence, which might receive a shock if silver exports go beyond a certain point or if the deflationary forces begin operating more vigorously, so that some incident such as a business failure might cause the market to become panicky.

The adoption by the Government of restrictive measures such as an embargo or an export duty on the exportation of silver would be a severe shock to the local market. Such action would be taken as an announcement that the Government considers the situation extremely serious, and would thus impair confidence. It would cause a very severe break in the exchange value of the dollar, and the value of silver in China would tend to diminish because of restriction of its free movement. In consequence, the disparity creating the value of silver in China and abroad would increase further and this would lead to extensive smuggling which because of China’s large area would be difficult to combat.

The fear has been expressed that an embargo would be a step away from a metallic currency basis in China, while the divorcing of silver in China from silver abroad undoubtedly would add materially to fluctuations in exchange and thus interfere with trade. A separate Shanghai market for silver would be materially less stable even than the world market.

  1. Telegram in nine sections.